Independent Directors

While it is a herculean statement, it is also a fact that boards of directors are ultimately liable for policies, procedures, and practices that will shape whether the organisation will thrive or dive. Therefore, the evaluation process is a commitment to develop the capacity of the board of directors to improvise both on their individual as well as collective contributions to the overall development and well-being of the organisation.

The need to work in changing economic conditions, mounting stakeholder expectations, pressures raised by globalisation and increased requirement of regulation have brought the quality of performance of the Boards of Directors under greater examination. Evaluation of the Board is an ongoing process and should not be treated as an annual process. It is a plain sailing way to gain quick feedback and to encourage discussion and interaction between board members, and it requires effort to put in place, but, offers great optimism and stability in the organisation in return. This growing recognition has resulted in Board evaluations becoming widely established internationally in rules-based as well as in principles-based jurisdictions and works as a critical structural tool for assessing Board effectiveness and efficiency.

The outcomes of Board evaluation processes could be slight changes in board processes, changes in the composition of the board and alterations in structures of the committee to promote significant steps towards rectifying those factors that resulted in board dysfunctionality. So, what needs to be taken under consideration is the Board structure, the Board’s role in governance, Its dynamics and functioning and the financial reporting process as well as risk management and internal controls. To be a meaningful exercise, the outcomes must be implemented as an actionable plan. The process of implementation then gains importance and naturally becomes a crucial step in the entire evaluation process and shall attain the whole of attention of the board as well as of the management.

A prime example of this issue can be given by the Uday Kotak Committee and how they have emphasized having transparency in matters involving disclosures of board evaluation. It has not only led to a greater amount of conviction among the Board and the organisation but also demonstrated itself as an illustrious company in public eyes.

As a result of this indispensable matter, in India, the Companies Act 2013 has made an amendment that evaluation of individual directors and of the chairperson, for all of the listed companies and such other companies to be prescribed as per the rules. The amended Clause 49 would as a consequence require the evaluation of the Independent Directors of those companies as well. The continuance and reappointment of the Independent Director would be determined as per the performance evaluation report. The process and methodology of evaluation has been left on the Board as per their convenience but the responsibility of this has been assigned to the Nomination and Remuneration Committee.

For the evaluations to turn out to be triumphant and the process to be smooth yet effortless, the Chairperson must be willing to head the evaluation and the Board should take the ultimate primacy and become the shoulder for the responsibility of managing both processes as well as the format of evaluations. Trusting the process and its transparency are critical for the success of the evaluation affair, as trust is the stimulus to vitalize candid input and feedback from the Board members.

Though it will prove out to be a time-consuming process, however, the aftermath will only lead to better anatomy in the organisation. It will provide the board with an invaluable yardstick by which it can prioritize its activities for the future and can also serve as an educational and consensus building function.